The Bush Administration, including Treasury Secretary Brady, is at long last looking hard at the central issue of "conditionality" on Third World debt. Press announcements that the President has endorsed the Brady Plan obscure the fact that the plan has been reduced to a concept, and the details that will be worked out in the weeks ahead are likely to revolutionize the way the IMF does business. The greatest beneficiaries will be the people of South America. Close behind will be U.S. bank stocks, languishing in the basement through the Bull Market, largely because of the black cloud of Latin American debt.
The most thrilling development is that the White House, from stem to stern as far as I can tell, is now committed to ending the austerity/devaluation prescriptions that the IMF has been feeding as medicine to the Third World debtor nations. It is almost certain that President Bush has a thorough appreciation of the issue. Everyone I have talked to at the CEA, the Vice President's office, and in the White House seems ardently committed to a Third World growth strategy. Nick Brady himself has undergone an education in the last two weeks and is talking about the need to change IMF conditions, and a few other Treasury officials and confidantes are urging him in that direction. Official meetings on the subject at the White House have aired the issue, with Brady taking a positive stance.
Debt relief is still a key ingredient of the plan. But Treasury should be able to work out a process whereby forgiveness is exchanged for IMF conditions of currency stabilization and growth-oriented tax reforms. The creditor banks should be permitted to write off portions of their loans and enjoy the tax benefits, in this indirect fashion putting part of the burden of the plan on non-bank taxpayers. How rapidly can such change crystallize, actually altering the course of debtor nation economies? The first change would be psychological, from doom and gloom to the possibility of non-inflationary growth. The bank stocks should be the earliest beneficiaries of such a shift, on the expectation that at least some of their non-performing loans will perform and that there is finally a longer-term strategy for Third World debt.
My optimism is tempered with the usual caveats, that there will be continued resistance from the devaluationists, that the IMF bureaucracy will have to be turned around, that the Brady Plan itself will continue to develop with cautious, hesitant steps. But this is the very first time the conditionality issue has been addressed at the highest level of the U.S. government and almost all the key players are leaning in the right direction. We also know the IMF and Treasury bureaucracies have plenty of people who are fed up with the austerity strategy and are also ready for change. It should not take more than a good shove from President Bush and Secretary Brady to get the hemisphere turned around! The top appointments that Treasury makes to the IMF, especially the U.S. executive director, are of course critical. As always, but especially in this case, policy is personnel.
I'm sharing this optimism with the rest of the world. I've written an op-ed piece on all this for The Wall Street Journal that is scheduled to appear Monday.